Find my old posts

Dear Milton

Happy birthday. I am sure that you are celebrating it with your beloved wife Rose in economist heaven.

Today it is 100 years ago you were born in Brooklyn New York. Your parents Sarah and Jeno surely must have been proud of you. I hope they are celebrating with you today as well – and you surely have given them a lot to be proud of over the past 100 years.

You undoubtedly share the top spot as the most famous economist in the world of the past century with your ideological counterpart John Maynard Keynes.

I first came across your work at an age of 16 or 17 years in the mid-1980s when I discovered the Danish edition of “Free to Choose”. I still remember reading it and since then I must admit that I have not stopped talking about Milton Friedman.

Free to Choose had a profound impact on my thinking. I became both a libertarian – or a classical liberal as you would say – and a monetarist. And the book convinced me that I would have to become an economist and so I did.

Free to Choose in my view is a revolutionary book. It might seem harmless, but most people who have read Free to Choose become convinced that the Freedom of Choice should be the foundation on which to build our society. Your ideas of school vouchers and the negative income tax had a very strong impact on my own thinking. It was these ideas that convinced me that individuals rather than government should be in charge of their own life.

You have always stressed that you are not a conservative. You are a classical liberal. That among other things means that you strongly opposed the military draft and you where instrumental in getting rid of this instrument of human slavery. In the 1980s and 1990s you got involved in the struggle to end the idiotic war on drugs. Unfortunately that war continues to this day. I have always seen your stance on these issues as a clear illustration of how great a humanitarian you are.

But you are not only a humanitarian. You are a great teacher and pedagogue. Just ask anybody who have studied at the University of Chicago while you were a professor there or anybody who have watched the “Free to Choose” TV series.

Speaking of the Free to Choose TV series. There is no doubt my favourite part of the TV series is the episode on inflation. The corresponding chapter in the Free to Choose book is what turned me into a monetarist. Before reading Free to Choose I thought that inflation was created by greedy and evil labour unions. Now I know that inflation is always and everywhere a monetary phenomenon. I still remember my fascination with the graphs in Free to Choose where you had plotted the money supply (relative to GDP) and the price level in different countries and I still find myself doing similar graphs on a regular basis – just have a look at my blog.

When you started the monetarist counterrevolution and reintroduced economists to Quantity Theory (and the equation of exchange MV=PY) in the 1950s most economists had forgotten about the importance of money. Today no serious economists will disagree that inflation is a monetary phenomenon.

There is no doubt that monetarism has been the single greatest intellectual influence on my own thinking and I rarely encounter a macroeconomic problem, which I would not analysis by looking at monetary matters. I learned from you that money matters. Robert Solow once said, “Everything reminds Milton Friedman of the money supply. Everything reminds me of sex, but I try to keep it out of my papers.”

Solow was of course joking, but he was right – you put the analysis of money at the centre of macroeconomic analysis. Unfortunately Solow and his compatriot Keynesians never understood the importance of money. Luckily you won. Eventually central banks started to understand and as a result inflation came under control in the 1980s around the world. I doubt that would have been possible had you not been around to teach policy makers the lesson. And that is one of your major qualities. You might disagree with people, but that never kept you away from having a dialogue – whether it was in Chile or China.

Today the problem is not inflation, but rather the risk of deflation. I do not know what you would think of the crisis today. I, however, know what I think of the crisis and that have been greatly influenced by your thinking – particularly by that great book you wrote with Anna Schwartz on the Monetary History of the United States. Monetary History undoubtedly is one of the most important books ever written on macroeconomic issues. Anybody who wants to understand what is happening today should read Monetary History and study your analysis of the causes of the Great Depression. You and Anna showed that the Great Depression was caused by the failure of the Federal Reserve to ease monetary policy. The Fed did it and I imagine that you sit in economist heaven and shake your head at the incompetence of today’s central bankers. They failed again. Sadly Anna Schwartz died recently, but I am sure that she has joined you and Rose in economist heaven.

I could go on and on about your contributions to economics and to the general societal debate around the world. And I could go on about the impact you have had on my own thinking, yes indeed on my life. It is now 11 years ago my book about your contribution to economics was published. I am proud of that book because it is a tribute to your work. I still regret not sending you a copy, but even though I think you are brilliant I doubt you would have been able to read it in Danish.

Anybody who has been following my blog will know that I to this day remains a Friedmanite. That goes for my politics, but even more for my economic thinking. I believe in freedom. I believe in free markets. I believe that we can not understand macroeconomic matters without understanding money.

Milton, you are missed but certainly not forgotten and now I think it is time for a toast. We raise our glasses and celebrate you on this day.

cthorm

“And yet it flies in the face of lived experience which shows clearly that the quality of public sector institutions varies widely.”

Yes, the quality of public sector institutions varies widely indeed. So why should we grant a monopoly to these institutions? Even if they start out being efficient, over time the lack of competition will ensure that their quality erodes.

Interesting how Friedman, writing in 2006 at the very height of the housing bubble (I clearly recall people that year taking on 40 year “negative amortization” loans with 5% down and “mortgage insurance” to buy a CONDO!!!) didn’t see the housing bubble crash coming. Other people saw it coming! Raghuram Rajan (another neo-classicist) saw the dangerous bubble developing, and he was roundly criticized for his paper predicting it that he presented at Greenspan’s retirement party in 2005, just one year prior to Friedman’s article above.

Any economist worth their salt should have seen it coming… but not Friedman, Greenspan, Bernanke, Larry Summers, etc. Friedman spent so much time analyzing the Great Depression, but failed to see the writing on the wall… he failed to see the private debt to GDP ratios going through the roof

or the millions of no-doc 40 year interest only loans… and then the “negative amortization loans” (which were peaking in 2006). How could he have missed it? Instead he lavishes praise on Greenspan. If only he’d lived to see Greenspan’s deer in the headlights look on his face when he testified before congress just three years later:

Any economists that failed to see 2008 coming should stop practicing economics! … especially one that lived through the S&L crisis in the late 1980s and early 1990s as Friedman had. That’s what’s called professional incompetence on a massive scale.

Mike Brown

This symposium in Jackson Hole, WY sponsored by the Kansas City Fed in 2005 is actually very interesting because they recorded the discussion after each presentation. You can see here Rajan defending himself for pointing out financial risks in his paper. Larry Summers calls him a “Luddite.” Bernanke, Meltzer, Taylor, Rubin and Greenspan were there as well, and you can read their comments and presentations! Nice to have such a good record of what exactly everybody said and presented. Most of them look like complete fools!